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MARCH 8, 2004 • VOLUME 12 NUMBER 17                                 

A real charity case?
Ripening of New Haven bank deal
creates particularly nasty odor

CAPITAL IDEAS
By Philip Moeller

One of the year’s largest wealth transfers will get under way on March 30, when shareholders of Connecticut Bancshares, the parent company of the Savings Bank of Manchester (SBM), meet at The Colonnade in Glastonbury at 11 a.m. They will be voting on whether to accept $52 in cash to sell each of their shares to NewAlliance Bancshares Inc., itself a holding company created by New Haven Savings Bank.

Are you confused? If not, let me hasten to add that NHSB, or NewAlliance if you prefer, is also buying Alliance Bancorp of New England, which is the holding company for Tolland Bank

All three deals — the demutualization of NHSB and the purchase by its successor company of the Manchester and Tolland banking franchises — are designed to occur more or less simultaneously.

If you’ve followed the news, you know that NHSB’s management was able to sell the bank out from under its depositor “owners” without having to seek their approval. A bill has been introduced to require such approval in future deals of this type, but of course, that is too late to help these depositors.

In addition to accessing some $400 million of equity capital, managers of the soon-to-be publicly owned NewAlliance will be raising upwards of $1 billion in an initial public offering. That’s $1.4 billion, more or less, that in a more ethical world would either belong to NHSB’s depositors and other customers or, at the very least, could be available to directly benefit the greater New Haven market where the bank has earned most of its money during its nearly 140-year history.

NewAlliance agreed it wouldn’t be sold for five years in order to win regulatory approval, but no one except NHSB management argues that the bank won’t eventually be swallowed by a larger financial institution. So the deal is a stinker, but, hey, that seems to be par for the course in the current “I’ve got mine, Jack” era.

When shareholders approve the deal — and they will — nearly $680 million of that $1 billion in new cash will, in effect, flow upstream from the New Haven market to central Connecticut and beyond, to out-of-state investors and Wall Street firms that have pieces of Connecticut Bancshares and Alliance Bancorp. In addition, many more millions of dollars may flow to executives of the acquired banks, courtesy of some very generous parachute provisions (see details in our issue last October 13).

Even though NHSB agreed to provide 4 million shares of New Alliance stock to a couple of local foundations, the demutualization was aggressively opposed by community groups and by John DeStefano, the mayor of New Haven. He called the foundation money a bribe and apparently held this view until Peyton Patterson, CEO of NHSB, increased the size of the bribe — er, the foundation contributions — at which point the mayor made nice. Or, rather, he agreed to sign a document saying his office would not bad-mouth the deal for five years, or risk losing access to a new $25 million community foundation the bank will establish.

If there’s a silver lining here, perhaps it can be found in the efforts of Adam Cohen, a West Hartford accountant who specializes in working with nonprofits. Cohen also has become something of a national expert in identifying unusually attractive opportunities for shareholders to make charitable contributions of appreciated stock.

And, boy, has Connecticut Bancshares stock appreciated. After SBM itself demutualized (no irony, there, huh?), its newly coined shareholders received their stock at $10 a share. In little more than a couple of weeks, they’ll get $52 a share in cash.

The downside, if there is one, is that anyone who held onto those shares from their inception would see that entire $42 gain as taxable long-term capital gains income. By contrast, owners of shares in Tolland Bank’s holding company can elect to receive 2.5 shares of NewAlliance shares for each share of Alliance Bancshares, in what generally would be a tax-free exchange.

Cohen is working with several area nonprofits to help them alert current and potential donors that a gift of Connecticut Bancshares stock before the shareholder vote can save a lot of tax dollars. All of the $52 value of the stock can be deducted from taxable income. Cohen has done this type of work with other local deals, including those involving Aetna and Stanley.

He stresses that people will still come out ahead if they simply pocket the $52 and pay their higher taxes. But for anyone who intends to make charitable contributions anyway, doing so with appreciated stock makes a lot of sense. The catch is that the charitable institution receiving the shares must have them before the Connecticut Bancshares sale is approved by shareholders (known as the ripening date).

Cohen did some sample transactions, using married taxpayers who owned 1,000 shares of Connecticut Bancshares and filed a joint federal tax return that reported $100,000 in adjusted gross income. They would pay about $18,000 in state and federal income taxes if they owned no stock and about $26,600 in taxes if they reported the entire $42,000 in capital gains. (For sticklers: the federal capital gains tax rate is only 15 percent as opposed to a higher marginal tax rate on ordinary income; Connecticut taxes both types of income at five percent.)

If the couple donated the appreciated stock to a public charity, and it was in the charity’s hands before the March 30 vote, then the entire $52,000 could be backed out of taxable income (actually, Cohen notes, only $30,000 could be deducted in a single tax year; the rest can be carried over and deducted in subsequent years). The couple would save more than $15,000 in federal and state taxes in the first year and another $5,500 or so with the carryover deduction.

Saving nearly $21,000 is terrific, but that’s only half of the $42,000 gain that would have been realized if the couple had owned the stock since it came out at $10 a share. Still, they will be faring much, much better than the depositors at NHSB, who will have to fork over $10 a share to have an ownership interest in an institution that, in theory, they used to own.

And if you really want to know how badly NHSB depositors got hosed in this deal, you should pay attention to shares in Alliance, the Tolland Bank holding company. As Barron’s noted the other day, the stock market is using Alliance as a proxy for its valuation of the NewAlliance deal. Alliance has been trading at about $41 a share, which works out not to the $10 price fixed on the stock, but to more than $16 a share for NewAlliance (keeping in mind that each Alliance share will soon be exchanged for 2.5 NewAlliance shares).

Instead of complaining, maybe NHSB depositors should just be happy to have had a favored shot at buying back their ownership of NewAlliance for $10 a share, and then flipping the stock for $16 and pocketing a tidy profit.

Join the party, folks.